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cash is used as the acquisition currency, the acquiror will need to raise additional capital
prior to, or concurrently with, the consummation of the acquisition. The need to raise
equity capital other than through the issuance of shares in a merger can present logistical
and strategic challenges, including concerns regarding the allocation of market risk
between the time at which the definitive terms of the acquisition are negotiated and the
time of closing. Conditions in a merger agreement relating to obtaining financing may
expose the primary deal to risk allocation in the financing agreements, where key terms
may be defined differently than in the merger agreement (e.g., lender outs for global
adverse changes in credit or capital markets are often found in debt financing
agreements) and are of particular importance in private equity transactions.
Assisted transactions, or acquisitions of troubled institutions on an unassisted
basis, raise additional structural challenges as the acquiror seeks to limit its exposure to
the troubled loan portfolio of the target and the related liability exposure to lender
liability and environmental claims as well as other extraordinary liabilities. A host of
approaches ranging from good bank/bad bank structures to structures involving
contingent securities or loss-sharing arrangements have been used in such situations.
Asset sales may also be an option. In 2008, a variety of structures were employed, ranging
from the FDIC’s takeover and management of IndyMac Bank and then an eventual sale to
a consortium of private investors, to U.S. Bank’s acquisitions (involving a loss-sharing
arrangement with the FDIC of Downey Savings and PFF Bank and Trust and JPMorgan
Chase’s acquisition of Washington Mutual (involving no FDIC loss-sharing deal but a
selective assumption of non-deposit liabilities), to Citigroup’s proposal to acquire
Wachovia’s banking operations and certain other assets with loss protection provided by
the FDIC on an identified asset portfolio (followed by Wells Fargo’s acquisition of
Wachovia on an unassisted basis).
A number of creative structures were used in thrift acquisitions after the Supreme
Court upheld the right of certain thrifts to bring goodwill litigation claims against the
government. Sellers wished to ensure that their shareholders received full and fair value
for any pending claims that the institution may have, while buyers remained reluctant to
place too high a value on uncertain recoveries. To resolve the valuation impasse between
buyer and seller, parties took steps such as establishing a litigation trust providing the
selling shareholders with a partial or full interest in the pending claims, as in
NationsBank’s acquisition of CSF. Establishment of such a trust can be complicated by a
federal statute that prohibits the assignment of claims against the federal government.
Other similar structures were utilized in First Nationwide’s acquisition of California
Federal, Ahmanson’s acquisition of Coast and Washington Mutual’s acquisitions of
American Savings and Bank United. A further variation on the theme was Golden State
Bancorp’s tax-free distribution of warrants to its shareholders representing the right to
acquire, for a nominal exercise price, further shares of Golden State common stock with
an aggregate value equal to 85 percent of the net after-tax proceeds from Golden State’s
339
prior to, or concurrently with, the consummation of the acquisition. The need to raise
equity capital other than through the issuance of shares in a merger can present logistical
and strategic challenges, including concerns regarding the allocation of market risk
between the time at which the definitive terms of the acquisition are negotiated and the
time of closing. Conditions in a merger agreement relating to obtaining financing may
expose the primary deal to risk allocation in the financing agreements, where key terms
may be defined differently than in the merger agreement (e.g., lender outs for global
adverse changes in credit or capital markets are often found in debt financing
agreements) and are of particular importance in private equity transactions.
Assisted transactions, or acquisitions of troubled institutions on an unassisted
basis, raise additional structural challenges as the acquiror seeks to limit its exposure to
the troubled loan portfolio of the target and the related liability exposure to lender
liability and environmental claims as well as other extraordinary liabilities. A host of
approaches ranging from good bank/bad bank structures to structures involving
contingent securities or loss-sharing arrangements have been used in such situations.
Asset sales may also be an option. In 2008, a variety of structures were employed, ranging
from the FDIC’s takeover and management of IndyMac Bank and then an eventual sale to
a consortium of private investors, to U.S. Bank’s acquisitions (involving a loss-sharing
arrangement with the FDIC of Downey Savings and PFF Bank and Trust and JPMorgan
Chase’s acquisition of Washington Mutual (involving no FDIC loss-sharing deal but a
selective assumption of non-deposit liabilities), to Citigroup’s proposal to acquire
Wachovia’s banking operations and certain other assets with loss protection provided by
the FDIC on an identified asset portfolio (followed by Wells Fargo’s acquisition of
Wachovia on an unassisted basis).
A number of creative structures were used in thrift acquisitions after the Supreme
Court upheld the right of certain thrifts to bring goodwill litigation claims against the
government. Sellers wished to ensure that their shareholders received full and fair value
for any pending claims that the institution may have, while buyers remained reluctant to
place too high a value on uncertain recoveries. To resolve the valuation impasse between
buyer and seller, parties took steps such as establishing a litigation trust providing the
selling shareholders with a partial or full interest in the pending claims, as in
NationsBank’s acquisition of CSF. Establishment of such a trust can be complicated by a
federal statute that prohibits the assignment of claims against the federal government.
Other similar structures were utilized in First Nationwide’s acquisition of California
Federal, Ahmanson’s acquisition of Coast and Washington Mutual’s acquisitions of
American Savings and Bank United. A further variation on the theme was Golden State
Bancorp’s tax-free distribution of warrants to its shareholders representing the right to
acquire, for a nominal exercise price, further shares of Golden State common stock with
an aggregate value equal to 85 percent of the net after-tax proceeds from Golden State’s
339
